S&P: LSC Communications Inc. Assigned 'B+' Rating; Outlook Negative; New Debt Rated
Simultaneously, we assigned our 'BB' issue-level rating and '1' recovery rating to the company's $400 million priority senior secured revolving credit facility due 2021. The '1' recovery rating indicates our expectation for very high (90%-100%) recovery of principal in the event of a payment default.
In addition, we also assigned our 'B' issue-level rating and '5' recovery rating to the company's $425 million senior secured term loan due 2023 and $400 million senior secured notes. The '5' recovery rating indicates our expectation for modest (10%-30%; upper half of the range) recovery of principal in the event of a default.
"The 'B+' corporate credit rating reflects the structural decline and intense price competition in the print industry, and LSC's good scale, market position, cash flow generation, and pro forma adjusted leverage forecast at 3.5x in 2016," said S&P Global Ratings' credit analyst Minesh Patel.
The negative outlook reflects our view that LSC's adjusted leverage is high and there is negligible margin for additional leverage at the 3.0x-3.5x leverage threshold for the rating. The outlook also reflects the risk that weaker-than-expected operating performance, economic weakness, lower debt repayment, or an increase in the secular headwinds could cause leverage to rise above 3.5x.
We could lower our corporate credit rating on LSC if we believe leverage will rise above 3.5x or remains at the high end of our 3.x-3.5x leverage threshold, or if covenant compliance declines to less than 15%. A downgrade would likely result from mid-single-digit revenue declines or due to the company facing difficulties reducing costs in line with revenue declines or operational missteps. We could also consider a downgrade if the company initiates any shareholder-rewarding programs or pursues large acquisition that changes our view of its financial policy.
Although an upgrade is unlikely over the next 12 months, we could raise the rating if we become convinced that downward pressure on both volume and price in the print industry will ease, and the company will be able to achieve stable revenue or positive organic growth, and maintain a stable EBITDA margin above 10%.